In-Depth: Community Leaders Explore Small-Business Lending Problems

Owning a small business can be filled with many unknowns and risks for the owners, especially in the current economy. With new or expanding small businesses being the largest source of private employment, many economic development experts are relying on building companies locally instead of the traditional model of recruiting large corporations to the community.

Today, many businesses are struggling to stay afloat because of troubles in the financial services industry, which have led to more-restrictive lending policies. In late winter and early spring, the St. Louis Fed’s Community Affairs department helped address the financing needs of small business by gathering key stakeholders to share their perspectives on lending matters.

The St. Louis Fed’s meetings helped identify credit gaps in small-business financing and gathered information on regional differences in access to credit. Participants included representatives from community and national banks, political offices, and community and business groups from the Little Rock, Louisville, Memphis and St. Louis zones. The key takeaways were similar, as participants generally agreed on the following:

• The economy continues to be an issue for small businesses, particularly with available capital and access to capital; consequently, many small businesses are more fragile. “The best customers we cater to are hunkering down, and we continue to support them in difficult times as best we can,” said one banker. He explained that if his bank can’t give a loan to a long-time customer, another bank won’t give that person a loan, either.
• For some, credit cards were their primary source of capital, but with some banks cutting credit card limits, owners are finding it harder to get other types of credit.
• Stricter underwriting standards are limiting the supply of loans to small business. Financial institutions have returned to more traditional underwriting standards, which are more dependent on equity and cash flow than on credit scores. At the St. Louis meeting, one financial institution representative described this as “getting back to lending basics in underwriting.”
• The demand for small-business support services and for assistance from small-business development centers is on the rise. Technical-assistance providers report that they are seeing a different type of client: Small-business owners who traditionally sought lending from banks are now seeking help from support-service providers and searching for alternative funding sources.
• Participants agreed that the U.S. Small Business Administration loan programs are great; however, most financial institutions have not taken advantage of the new programs and increased guarantees. Many bankers see SBA products as requiring too much preparation and monitoring of the loans as too cumbersome.
• Collaboration between financial institutions and support-service providers is needed to sustain small-business development. A referral system and better communication are needed between the organizations.

Findings from these local meetings are being combined with information collected from around the country. As a result of what the Fed learned, the Fed’s Board of Governors in August will share the findings and best practices and discuss future actions. In the Eighth District, the next step will be to bring together lenders, technical-assistance providers and alternative financial providers to explore the possibility of developing a loan fund for the St. Louis region. Several meeting participants have expressed their interest in being part of the ongoing dialogue.

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When Will Business Lending Pick Up?
http://research.stlouisfed.org/publications/es/10/ES1008.pdf